Equity release allows you to access some of the value of your home while you carry on living there. To qualify you need to be a UK home owner aged 55 or older with a property worth at least £70,000.
With equity release, you can access funds and stay living in your home for as long as you want to. You can use the money you release for almost anything you like – including funding your home care fees.
When considering equity release to help fund care fees, you could release a large, single payment and buy a care plan or release smaller sums as and when you need them. A care funding plan will pay out a regular, guaranteed amount to your care provider for as long as you live.
Types of equity release
There are two types of equity release currently available:
Both types of equity release allow you to:
- stay in your home, and
- release money from the property (either as a lump sum or a series of smaller amounts).
You can use the money you release to pay care fees – or anything else that you may need it for. These products may be more appropriate if you want care at home (domiciliary care).
- With both options you’ll have to keep paying buildings insurance and covering the costs of maintaining your home.
Equity release is a good solution for many people – but it’s not for everyone. That’s why it’s vital you take expert, independent, financial advice before going ahead with equity release.
The Equity Release Council is a trade body whose sole purpose is to promote high standards of conduct and practice throughout the equity release market, with consumer safeguards at its heart. They make sure their members follow a strict code of conduct designed to protect customers. Make sure you use an adviser listed as a member on their website and any products you consider are from member companies.
Lifetime mortgage (available to UK homeowners over 55)
With a lifetime mortgage, you take out a loan against your property but still own it.
You don’t usually have to make regular interest payments unless you choose to do so.
Interest is charged on both the amount borrowed and any interest already added to the debt (also known as compound interest). The loan’s usually repaid when the property is sold after the last remaining owner:
- passes away, or
- moves permanently into a care or nursing home.
Advantages of a lifetime mortgage
- You continue to own your home.
- It can provide a large single payment or you can take smaller amounts as you need them.
- Your funds can usually be released more quickly than waiting for a sale.
- You don’t have to make regular payments of interest or capital.
- Some lifetime mortgages allow you to pay the interest each month to reduce the amount of outstanding debt.
- There are usually no repayments to make as the loan is designed to be repaid when the last remaining home owner dies or moves permanently into a care or nursing home.
- You’ll benefit from any future increases in the value of the property.
- Interest is charged at a fixed interest rate.
- Lifetime mortgages from a member of the Equity Release Council have a no-negative equity guarantee (subject to meeting the products terms and conditions). This means you’ll never owe more than the value of your home when it is sold.
- When your property is sold, and the debt paid off, there may be money left over to provide some inheritance.
- The equity released from your home is tax-free.
- You have the right to move and transfer the lifetime mortgage to your new home so long as you buy a property that meets your lender’s criteria.
Disadvantages of a lifetime mortgage
- You won’t be able to release the full value of your home.
- Any debts secured against your property, like an existing mortgage or loan, must be paid off at the same time as taking equity release. You can do this either by using some of the money released or by other arrangements, such as using savings. If you use the released money, it may leave you with less funds than you thought.
- Unless you choose to repay the interest each month, interest will be charged on both the amount borrowed and any interest already added to the debt (also known as compound interest).
- Interest rates are usually higher than standard mortgage rates.
- The property will be sold when the debt needs to be repaid (when the last remaining homeowner passes away or moves permanently into residential care). This will happen unless there’s another source of money available that can repay the lifetime mortgage in full.
- Releasing equity may affect your entitlement to means-tested benefits.
- Any inheritance passed on to beneficiaries will be substantially reduced and won’t include the property itself. This will apply unless the outstanding mortgage is repaid from other sources.
- It can be inflexible if your circumstances change. You may need the lender’s permission for someone else to move in; such as a relative, carer or new partner.
- There are costs involved – such as arrangement, valuation, legal and set-up fees. However, these can often be added to the value of the loan.
- You might have to repay some of the debt early if you want to move to a lower-value property.
- Unless you use the money released to buy a care funding plan, the money could run out. This will mean you’ll have to find an alternative way to continue paying your care fees.
- Early repayment charges may apply, if you want to redeem the mortgage early.
- You may not be eligible for a Deferred Payment Agreement from your local authority.
Home reversion (mostly available to UK homeowners over 65)
With a home reversion plan, some or all of your property is sold to the home reversion provider. This is in return for:
- a cash lump sum, and
- a rent-free lifetime lease, ensuring that you can stay in your home for the rest of your life.
Advantages of home reversion
- With home reversion you can usually release more money than you could with a lifetime mortgage.
- The money generated by selling all or part of your home can create a lump sum or income to help cover your care fees.
- Home reversion is not a loan so there are no repayments to meet.
- You can live in the property, rent-free, for life.
- There’s no risk of negative equity because you sell all or part of your home to the home reversion provider.
- It allows you to receive care in your home.
- If you only sell part of your home, you can still leave behind an inheritance for loved ones.
Disadvantages of home reversion
- To release equity using home reversion you have to sell all or part of your property to the home reversion company.
- You won’t be able to release the full value of your property. This is because the home reversion provider pays less than the market value.
- You won’t be able to pass on the full value of your property to your beneficiaries. This is because you’ll have sold all or part of it to the home reversion company.
- Unless you use the money to buy a care funding plan, the money could run out. This could leave you to find alternative ways of paying your care fees.
- Money you release must first repay any debts secured against your property, such as paying off an existing mortgage.
- If you sell up or die soon after taking out a plan, your estate could incur a loss.
- You may not be able to get a Deferred Payment Agreement.
What about standard mortgages?
Elderly people can get standard mortgages – if they can prove affordability. Interest rates are typically lower than lifetime mortgages as you have to make regular repayments.
As with equity release, taking out a standard mortgage may prevent your local authority from offering you a Deferred Payment Agreement. This is because they won’t necessarily be able to secure the required first legal charge on the property.
Find people who can help
A financial adviser who specialises in care funding can give you advice regarding standard mortgages.
They’ll help you look at your finances and plan for the costs of care, both now and in the future. They’ll also understand how the care system works, and any other sources of funding that may be available to you.
You can use our care fees adviser directory to find a financial adviser who’s local to you.